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tutorial9

Course: ECON 2206, Fall 2011
School: UNSW
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Week9TutorialExercises ReviewQuestions(thesemayormaynotbediscussedintutorialclasses) Whatisheteroskedasticityinaregressionmodel? Whenhomoskedasticity(MLR5)failsandthevarianceofthedisturbance(u)changesacross observationindex(i),wesaythatheteroskedasticityispresent. Inthepresenceofheteroskedasticity,arethetstatandFstatfromtheusualOLSstillvalid?...

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Week9TutorialExercises ReviewQuestions(thesemayormaynotbediscussedintutorialclasses) Whatisheteroskedasticityinaregressionmodel? Whenhomoskedasticity(MLR5)failsandthevarianceofthedisturbance(u)changesacross observationindex(i),wesaythatheteroskedasticityispresent. Inthepresenceofheteroskedasticity,arethetstatandFstatfromtheusualOLSstillvalid? Why?ArethereanyotherproblemswiththeOLSunderheteroskedasticity? TheusualtstatandFstatarenotvalidbecausetheusualOLSstandarderrorsareincorrect underheteroskedasticity.FurthertheOLSestimatorwillnolongerbe(asymptotically)efficient andtherearebetterestimators. Whataretheheteroskedasticityrobuststandarderrors?HowdoyouusetheminSTATA? Thesearethecorrectedstandarderrorsthattakeintoaccountthepossiblepresenceof heteroskedasticity.ThetstatandFstatcomputedusingtheheteroskedasticityrobuststandard errorsarevalidteststatistics.InSTATA,theseareeasilyobtainedbyusingtheoptionrobust withtheregresscommand,e.g.,regress lwage educ, robust; Howdoyoudetectifthereisheteroskedasticity? TheBreuschPagantestortheWhitetestcanbeusedtodetectthepresenceof heteroskedasticity.SeeSection8.3fordetails. Ifheteroskedasticityispresentinaknownform,howwouldyouestimatethemodel? Inthiscase,theWLSestimatorsshouldbeused,whichismoreefficientthantheOLSestimators. SeeSection8.4fordetails. Ifheteroskedasticityispresentinanunknownform,howwouldyouestimatethemodel? Ifthereisstrongevidenceforheteroskedasticity,theFGLSestimatorsshouldbeused,whichis basedonanexponentialfunctionalform.SeeSection8.4fordetails. WhatarethestepsintheFGLSestimation? YoushouldsummarisefromSection8.4. HowwouldyouhandletheheteroskedasticityoftheLPM? TheheteroskedasticityfunctionalformisknownfortheLPM.HencetheWLScanbeusedin principle.However,becausetheLPMcanproducepredictedprobabilitiesthatareoutsidethe interval(0,1),theknownfunctionalformp(x)[1p(x)]maynotbeusefulfortheWLS.Inthatcase, itmaybenecessarytouseFGLSfortheLPM. ProblemSet(thesewillbediscussedintutorialclasses) Q1.Wooldridge8.1 Parts(ii)and(iii).ThehomoskedasticityassumptionplayednoroleinChapter5inshowingthat OLSisconsistent.Butweknowthatheteroskedasticitycausesstatisticalinferencebasedonthe usualtandFstatisticstobeinvalid,eveninlargesamples.Asheteroskedasticityisaviolationof theGaussMarkovassumptions,OLSisnolongerBLUE. Q2.Wooldridge8.2 WithVar(u|inc,price,educ,female)=2inc2,h(x)=inc2,whereh(x)istheheteroskedasticity functiondefinedinequation(8.21).Therefore,h(x)=inc,andsothetransformedequationis obtainedbydividingtheoriginalequationbyinc: beer/inc=0(1/inc)+1+2price/inc+3educ/inc+4female/inc+u/inc Noticethat1,whichistheslopeonincintheoriginalmodel,isnowaconstantinthe transformedequation.Thisissimplyaconsequenceoftheformoftheheteroskedasticityand thefunctionalformsoftheexplanatoryvariablesintheoriginalequation. Q3.Wooldridge8.3 False.TheunbiasednessofWLSandOLShingescruciallyonAssumptionMLR.4,and,asweknow fromChapter4,thisassumptionisoftenviolatedwhenanimportantvariableisomitted.When MLR.4doesnothold,bothWLSandOLSarebiased.Withoutspecificinformationonhowthe omittedvariableiscorrelatedwiththeincludedexplanatoryvariables,itisnotpossibleto determinewhichestimatorhasasmallbias.ItispossiblethatWLSwouldhavemorebiasthan OLSorlessbias.Becausewecannotknow,weshouldnotclaimtouseWLSinordertosolve biasesassociatedwithOLS. Q4.Wooldridge8.5 (i)No.Foreachcoefficient,theusualstandarderrorsandtheheteroskedasticityrobustonesare practicallyverysimilar. (ii)Theeffectis.029(4)=.116,sotheprobabilityofsmokingfallsbyabout.116. (iii)Asusual,wecomputetheturningpointinthequadratic:.020/[2(.00026)]38.46,soabout 38andonehalfyears. (iv)Holdingotherfactorsintheequationfixed,apersoninastatewithrestaurantsmoking restrictionshasa.101lowerchanceofsmoking.Thisissimilartotheeffectofhavingfourmore yearsofeducation. (v)WejustplugthevaluesoftheindependentvariablesintotheOLSregressionline: =.656.069log(67.44)+.012log(6,500).029(16)+.020(77).00026(77).0052. Thus,theestimatedprobabilityofsmokingforthispersonisclosetozero.(Infact,thispersonis notasmoker,sotheequationpredictswellforthisparticularobservation.) Q5.WooldridgeC8.10(401ksubs_c8_10.do) (i)Inthefollowingequation,estimatedbyOLS,theusualstandarderrorsarein( ) and the heteroskedasticityrobust standard errors are in [ ]: 401 =.506+.0124inc.000062inc2+.0265age.00031age2.0035male (.081)(.0006) (.000005) (.0039) (.00005) (.0121) [.079][.0006] [.000005] [.0038][.00004] [.0121] 2 n=9,275,R =.094. Therearenoimportantdifferences;ifanything,therobuststandarderrorsaresmaller. (ii)Thisisageneralclaim.SinceVar(y|x)=p(x)[1p(x)],wecanwriteE(u2|x)=p(x)p(x)2.Written inerrorform,u2=p(x)p(x)2+v.Inotherwords,wecanwritethisasaregressionmodelu2=0 +1p(x)+2p(x)2+v,withtherestrictions0=0,1=1,and2=1.Rememberthat,forthe LPM,thefittedvalues, ,areestimatesofp(x).So,whenweruntheregression on and (includinganintercept),theinterceptestimatesshouldbeclosetozero,thecoefficienton shouldbeclosetoone,andthecoefficienton shouldbecloseto1. (iii)TheWhiteLMstatisticandFstatisticabout581.9and310.32respectively,bothofwhichare verysignificant.Thecoefficienton 401 isabout1.010,thecoefficienton 401 2about.970, andtheinterceptisabout.009.Theseestimatesarequiteclosetowhatweexpecttofindfrom thetheoryinpart(ii). (iv)Thesmallestfittedvalueisabout.030andthelargestisabout.697.TheWLSestimatesof theLPMare 401 =.488+.0126inc.000062inc2+.0255age.00030age2.0055male (.076)(.0005) (.000004) (.0037)(.00004) (.0117) 2 n=9,275,R =.108. TherearenoimportantdifferenceswiththeOLSestimates.Thelargestrelativechangeisinthe coefficientonmale,butthisvariableisveryinsignificantusingeitherestimationmethod.
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